Although general business news in the U.S. 2020 has been dominated by Covid-19 and businesses’ response to the Black Lives Matter movement, another far more technical development in the field of corporate Environmental, Social & Governance (ESG) has also prompted important change across industries and sectors. There has been a stampede of Corporate Social Responsibility (CSR) executives working hard to understand how they can evolve years long “CSR programs” into “ESG Strategies” designed and publicly reported by companies to resonate with investors as well as CSR’s traditional audience of customers, employees and host communities.
As a result, CSR executives (if companies have them), Corporate Affairs and General Counsel from many companies without organized ESG Strategies have been getting a crash course in the “alphabet soup” of global standard setters for Corporate Sustainability. Which is a field that is more than thirty years in development but suddenly evolving from being the province of the Fortune 500 and publicly traded growth firms to being applicable to all sophisticated companies (see below Bob Massie’s “Welcome to the ESG Evolution”). Fortunately, Corporate Sustainability and the alphabet soup of global standards developed over the last generation to help advance it, is much more confusing initially than after a patient examination of its development, institutions, processes and expectations.
What Created the Stampede in 2020 to ESG Management & Reporting?
In January of this year, just before Covid-19 emerged as the global pandemic experts long warned about – Larry Fink, CEO of Blackrock (the world’s largest investment management firm with $6+ trillion under management) sent a letter to the 2,700+ companies Blackrock invests requesting that CEOs take responsibility for reporting on Environmental, Social and Governance (ESG) issues. Fink’s letter to portfolio CEOs has become an annual event in the field of Corporate Sustainability over the last several years and it reflects the far wider growth of ESG conscious investing that SR Inc has noted in the Sustainable Leadership blog several times. Far more than in years past, however, Fink’s letter this January was specific and threatened shareholder action by Blackrock, if not respected. The letter requested the CEOs be responsible for ESG reporting aligned with the Sustainability Accounting Standards Boards (SASB) industry specific identification of ESG items material to financial investors and with the Task Force on Climate-related Financial Disclosure (TCFD) guidance on identifying climate related risks. Unsurprisingly, this prompted many companies to seek to understand these and related standards in ESG management and reporting.
In a blog post earlier this summer, SR Inc defined CDP as Three Letters that Spell: Time Consuming & Necessary. For more than twenty years, rating systems and reporting frameworks like CDP have encouraged companies to both ingrain sustainability into their governance structures and to outperform their peers. While many companies and stakeholders view CDP as the most important ESG reporting framework, it is far from the only popular one. As shown in the figure below, a recent report from the Governance & Accountability Institute finds that 90% of the S&P 500 reports annual on their ESG efforts, with 65% of those responding to CDP, 51% using the Global Reporting Initiative (GRI), 25% using the Sustainability Accounting Standards Board (SASB), and 16% using the Taskforce on Climate-related Financial Disclosures (TCFD).
Bob Massie’s “Welcome to the ESG Evolution” from 2016 in Institutional Investor provides a cogent summary of the development of global standard setters in more sustainable business. In the article, Massie provides a first person account of the founding of several global reporting frameworks and related standards. Massie notes that when he Co-founded the GRI in 2002, there were hardly any ESG frameworks and rating systems. But as SustainAbility’s Rate the Raters noted in 2018, there are now more than 600. This explosive growth was driven by client demands for investors to use more extensive ESG reporting to improve investment decisions. While investors now have more information than ever to make those informed decisions, many operating executives in companies are confused by what surveys to respond to, what rankings to pay attention to, and how to report in general. Fortunately, multiple efforts to consolidate and streamline the reporting process continue to proceed. Just this month, five leading sustainability and integrated reporting organizations – CDP, CDSB, GRI, IIRC and SASB – announced a Statement of Intent to Work Together Towards Comprehensive Corporate Reporting.
How complicated the multiple, overlapping, decades in development global reporting frameworks, standards and rating systems are can be overstated. Particularly by private research and rating agencies promoting their own, distinct, ranking system. Since ESG reporting frameworks, standards and ratings are generally designed for and marketed to financial investors, they can seem particular obtuse to operating executives. This leaves corporate managers responsible for developing, driving and reporting ESG Strategies to be educated by consultants who have often not spent years working with ESG frameworks and standards. Furthermore, these consultant are regularly paid by the hour and, therefore, lack a clear incentive to provide efficient and simplifying advice.
Consequently, SR Inc Advisors regularly find it helpful to explain the proliferating constellation of global frameworks, standards and rating systems in relatively simplistic terms (at least initially) and to highlight the most important global standard setters. While explaining the largely complementary nature of a small handful of leading and needed – mostly non-profit – institutions. See below a deliberately simplistic take on selected standard setters:
SBTi – Climate goals aligned with the Unites Nations (UN) Intergovernmental Panel on Climate Change (IPCC). The Science Based Targets Initiative (SBTi) – run by CDP, the UN Global Compact, WRI, WWF, and We Mean Business – is currently composed of 1,000 multinational companies committed to reducing greenhouse gas emissions in line with what the IPCC says is necessary to stave off the worst affects of climate breakdown. SBTi sets the methodology and approves corporate goals that are aligned with the “well-below 2 degrees,” 1.5 degrees, and soon Net Zero scenarios.
DJSI – The most venerable sustainability index. RobecoSAM’s (now part of S&P Global) Corporate Sustainability Assessment (CSA) is the questionnaire used to determine companies’ eligibility for inclusion in the Dow Jones Sustainability Index (DJSI). Companies scoring in the top 10% of their industry in the CSA that year are ranked on the DJSI.
We welcome the opportunity to discuss with current and potential Member-Clients how SR Inc can help your company design an ESG Strategy aligned with your company’s purpose and leveraging your companies unique strengths and positioning to drive a sustainable competitive advantage (find a case study here). While better managing and reporting ESG risks and opportunities and, specifically, identifying new revenue opportunities and driving improving margins as your company better aligns with the demands of your customers, employees, investors, suppliers and host communities’ lives.
